Results for “manipulation” 81 found
Prediction Markets Have Arrived!
Donald Luskin writes:
There is now no question whatsoever that the Bush re-election futures contract at Tradesports.com is being manipulated. Yesterday the price of the futures were sold down from about 55 (indicating the market’s estimate of a 55% probability of Bush’s re-election) to 10 (indicating a 10% probability) with a single 10,000-lot order entered by a single trader. An order that size represents twice the normal volume of an entire typical day’s trading. Within moments after the order was completed, the price recovered back to the low-mid-50’s.
According to sources at Tradesports, yesterday’s order was entered by the same individual who has heavily sold the Bush futures three times over the past month. The first instance was on September 14, when this trader sold the futures down from the mid-60’s to 49.6. The second instance was in the middle of the second presidential debate on October 8, when the futures were sold down from the high 50’s to 51.5. The third instance was right after the third presidential debate on October13. As the debate began the futures were priced at 57, and by the end of the debate they had risen to 60. Then a few moments later they were beaten down to 54 in a matter of minutes.
Luskin hints that George Soros might be at work. Wouldn’t that be cool! What I see as most interesting is a) an order twice the normal volume of an entire day’s trading had virtually no influence on the market price and b) prediction markets are now so widely followed that someone finds it worthwhile to try to manipulate them.
Should Luskin be worried that his candidate is being sold down? Not at all. A surprising result in these markets is that manipulators subsidize information traders. Think about it this way, by definition manipulators aren’t trying to predict the true outcome so they are likely to take losses and the more they try to manipulate the bigger the losses. Now if the manipulators are taking losses who is making money? The information traders! Manipulators, therefore, encourage and support the information traders. Manipulation isn’t impossible but it’s surprising how little information other trader’s need to not only avoid the manipulation but to profit from it.
Our colleague, Robin Hanson, has written a paper explaining the theory (warning, not for the mathematically faint hearted) and an experimental paper showing that the theory works in practice.
Thanks to Newmark’s Door for the link.
Government Sues to Raise Drug Prices
The headline in the NYTimes read “Schering Case Demonstrates Manipulation of Drug Prices.” The article continued:
A $345.5 million settlement by Schering-Plough yesterday to resolve a government Medicaid investigation provides a detailed glimpse into how drug companies can manipulate prices to overcharge state and federal programs.
Government officials have taken a keen interest in how drug makers price and market their drugs in recent years, and the settlement is the latest in a series reached with large drug makers over accusations that they have overcharged Medicaid. Last year, Bayer paid $257 million and GlaxoSmithKline paid $86.7 million to settle similar allegations.
Now you probably think this article is about how drug firms acted collusively in order to raise prices, right? Nope, read carefully and you will see that intense competition from Allegra caused Schering to reduce the price of Claritin. Great! Not according to the Feds. The price reductions violated Medicare’s Most Favored Customer clause which requires pharmaceutical manufacturers to give Medicare the lowest price they offer any other customer.
Most Favored Customer/Nation clauses are routinely analyzed in game theory texts as ways for firms to tacitly collude to raise prices. The idea is simple – it’s easier to commit not to compete if lowering price for one customer means lowering prices for all customers. Indeed, this is precisely why the antitrust authorities often sue to prevent firms from using MFC clauses. The evidence supports the theory, after the MFC clause was introduced pharmaceutical prices rose.
The US Attorney may think that “we’re fighting to keep the costs of health care down for everyone,” but in truth by reducing competitive pressures to lower prices they are helping the pharmaceutical firms to maintain a cartel.
Addendum: Put it this way, now that the government has successfully sued the firms for reducing prices do you think a) the firms will now cut the price to Medicare to match the rebates or b) stop giving rebates?
Terror Betting Markets and the 9/11 Commission
Remember “terrorism betting markets”? The program was killed one day after it made headlines – so much for democratic inertia! Opponents plausibly argued that these markets made terrorism pay. According to a press release by Senators Wyden and Dorgan:
Terrorists themselves could drive up the market for an event they are planning and profit from an attack, or even make false bets to mislead intelligence authorities.
Of course, you hardly need terrorism betting markets to make money from terrorism; all you need to do is short the stocks of firms that will be adversely affected (say… airlines?). So if betting on terrorism scares you, you should still be scared! But before you start losing sleep, check out the findings of the 9/11 Commission. They find no evidence of 9/11-related stock market manipulation. Here are the two key passages:
There also have been claims that al Qaeda financed itself through
manipulation of the stock market based on its advance knowledge of the 9/11
attacks. Exhaustive investigations by the Securities and Exchange Commission,
FBI, and other agencies have uncovered no evidence that anyone with advance
knowledge of the attacks profited through securities transactions. (pp.171-2)
Highly publicized allegations of insider trading in advance of 9/11 generally rest on reports of unusual
pre-9/11 trading activity in companies whose stock plummeted after the attacks. Some unusual trading did in fact
occur, but each such trade proved to have an innocuous explanation. For example, the volume of put options–
investments that pay off only when a stock drops in price–surged in the parent companies of United Airlines on
September 6 and American Airlines on September 10–highly suspicious trading on its face. Yet, further investigation
has revealed that the trading had no connection with 9/11. A single U.S.-based institutional investor with no
conceivable ties to al Qaeda purchased 95 percent of the UAL puts on September 6 as part of a trading strategy
that also included buying 115,000 shares of American on September 10… The SEC and the FBI, aided by other agencies and the securities industry, devoted enormous
resources to investigating this issue, including securing the cooperation of many foreign governments. These
investigators have found that the apparently suspicious consistently proved innocuous. (p.499)
It is worth pointing out that even if the 9/11 Commission had found evidence of a terror/stock market connection, there would still be almost no case against the original plan for terrorism betting markets. The maximum bet was under $100. I like the economic theory of suicide as much as the next economist, but I still can’t imagine any would-be terrorist changing his mind over a Benjamin.
Thanks to my colleague and terrorism betting market lightning rod Robin Hanson for the 9/11 pointer. See also Alex’s short piece In Defense of Prediction Markets, kindly made available by Mahalanobis.
Ralph Nader and the regulation of neuroscience
Ralph Nader’s Commercial Alert group seeks to restrict or prohibit commercial research into neuroscience. You might recall that researchers at Emory are hard at work on this problem:
Neuromarketing research uses a magnetic resonance imaging machine, or MRI, to determine which parts of the brain react to different types of advertising in an effort to help marketers develop more effective marketing techniques for selling their products or services.
The critics charge that the research is directed at finding a “buy button” in the mind. Critics also raise the specter of mind control and the loss of individual autonomy. Commercial Alert makes the following threat:
“It is wrong to use medical research for marketing instead of healing,” Ruskin said. “If Emory University doesn’t stop this immediately, we will do everything in our power to shut down Emory’s federal funding.”
My take: The neuroscience techniques remain unproven, but in the meantime corporations are subsidizing an important science. Many of our most significant scientific discoveries have been by accident, when people were looking for some other result altogether. The support for research may well have a real long-run payoff.
Furthermore the worries are overblown. Let’s say we found such a buy button and that corporations could use that knowledge in their ads. Would it really shift the marketing balance of power in favor of sellers? Over time I would expect buyers to compensate, as the knowledge would not stay secret for very long. We could imagine lists of products that were sold by manipulative techniques, and customers would know to stay away from such products. A technological arms race would be set off. We could imagine private entrepreneurs selling “counter-persuasion” techniques to customers, perhaps in the form of drugs, warning buzzers, or counter-subliminal images flashed into your eyeglasses (the latter product is already under development!). Or how about programming the microchip credit card embedded in your arm to discourage or prevent such manipulation-induced purchases? Or how about if consumers use neuroscience to learn how to be truly happy staying at home and cultivating their gardens?
Sellers seem to have the biggest advantage when manipulation techniques are less than transparent. So neuroscience research into buyer behavior may be a classic prisoner’s dilemma problem. Various sellers may pursue such knowledge, hoping to get a leg up on the competition. The long-run result may be an evaporation of business advantage and an empowering of consumers.
Thanks to Kevin McCabe for the pointer on this issue, check out his neuroeconomics blog.
The economics of cheese
Free trade is not only good for prosperity, it is also good for fine food shopping. Here are some pithy comments on a recent book on the history of Camembert cheese:
Fifty years ago, or even twenty-five, it was very hard, if not impossible, to get cru Camembert – or gold seal balsamic vinegar, or single-estate Tuscan extra virgin olive oil, or jambon de Bayonne, or Ortiz salt-packed Spanish anchovies, or Niçoise olives – if you didn’t live in a world metropolis or in the regions near where they were produced. Now they are all widely available. Thanks to the Internet, Fedex, the food-writers (and their globalised publishing firms), the once-local has become global.
Nor is it just the distant local that has a place in the markets; preferences for the local local are now better catered for than at any time in the recent past: farmers’ markets flourish as never before in both Britain and America; the role of the “forager” – searching out the quality produce of local farmers for top restaurants – has become institutionalised; the formerly resistant Californian wine industry is rediscovering the power of place as against the manipulations of the scientific winemaker; the cheese plates at better American eateries feature increasingly convincing Sonoma County goat cheeses and one of the finest semi-soft goat cheeses in the world, the Cypress Grove Humboldt Fog; the Slow Food movement gathers strength throughout the world and reinforces the revival of the local and the seasonal.
Here is the full book review, from The London Review of Books, the piece is interesting throughout. Here is an earlier post on the corporate origins of Maytag cheese in the United States. Here is a post on using radar to improve the quality of wine.
The bottom line: When I first started going to Europe, in the early 1980s, I was amazed at the quality of the foodstuffs, but America is catching up rapidly. The next steps: lower price supports for dairy products, lower duties on foreign cheese, and free importation of non-pasteurized cheeses, the opposite of what Hillary Clinton wants.
Terrorism futures are back
Yes, those terrorism futures, here is a story from cnn.com. The old group, Net Exchange, is behind the current revival, but this time without a Pentagon connection.
The idea is being marketed as a research tool:
In response to the highly charged criticisms that ended the Pentagon’s association with the project, Polk [a Net Exchange spokesman] noted the market is designed mainly as a research tool, not unlike the Iowa Electronics Markets, which have done a pretty good job of predicting the outcomes of presidential elections.
“It is potentially an interesting alternative to Gallup polls or to specialists reporting from the region,” Polk said. “It’s a way of going directly to individuals in the region or outside who have knowledge or interest in the political and economic events in the area.”
Polk said Net Exchange would initially limit the amount of money traders could invest in the market, so that people won’t be profiting from violence or upheaval in the region.
What’s more, the futures contracts would be based on general questions, such as the likelihood that the King of Jordan will be overthrown at some point during the second quarter of 2004, for example, rather than on specific acts or events, which could lend themselves to manipulation by terrorists.
My prediction: These markets require legal tolerance, given that they otherwise violate anti-gambling rules or fall under regulatory jurisdiction. I’ll bet that this revival is shut down pretty quickly.
My view: Most of the movements in asset prices are noise, rather than based on fundamentals. The main problem with the idea is that the price movements, even if “unbiased” in the mathematical sense, feed us a steady stream of misinformation about world affairs. I also could imagine public panic resulting, or bad events being accelerated into greater likelihood, imagine how Jordanese politics is altered if the betting market says the King of Jordan is a goner.